ACTIVITY BASED COSTING

What ia ABC ?
Activity Based Costing (ABC) is a managerial accounting system which determines the cost of activities without distortion and provides management with relevant and timely information. ABC represents a way to look at operating costs and provides methods to dissect the underlying activities, which cause costs to exist.

What ia ABC ?
It is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. With ABC, an organization can soundly estimate the cost elements of entire products and services and provides a more scientific method of costing than the Traditional Approach to costing .

ABC APPLICABILITY
Identify inefficient products, departments and activities. To allocate more resources on profitable products, departments and activities. To control the costs at any per-product-level level and on a departmental level. To find unnecessary costs that may be eliminated. Fixing the price of a product or service

STEPS IN ABC APPROACH

Step 1: Activity Identification

First, activities must be identified and grouped together in activity pools. Activity pools are the supporting activities that tie it to a product line or service These pools or buckets may include fractionally assigned costs of supporting activities to individual products as appropriate during the second step.
Step 2: Activity Analysis

Develop relationship between activities and cost objectives Identifies indirect cost relationships and allows assignment of some percentage of that activity to an end product directly.

STEPS IN ABC APPROACH

Step 3: Assignment of Costs Based on the findings of step #1 and #2, costs are assigned to an activity pool. These pools will each have some contribution to object cost and shows the total cost pool. Step 4: Calculate Activity Rates

Identify cost drivers Transaction/ Duration/Intensity drivers

STEPS IN ABC APPROACH

Step 5: Assign Costs to Cost Objects
Once activity costs, pools and rates are identified and clearly defined, the next step is to assign them to cost objects. Objects are generally defined as the results offered to a customer

Step 6: Prepare and Distribute Management Reports

Once ABC costing analysis is complete, that cost data should be placed in a concise and coherent manner for cost object and process owners. .